How to hitch on to a rising star

China-focused funds have certainly offered stellar returns recently, although this year's results are down somewhat and the long-term numbers vary. AGF China Focus Class, which dates back to April, 1994, made 63 per cent last year and has a return since inception of 2.87 per cent. Talvest China Plus made 40.5 per cent last year and a stunning 203.5 per cent gain in 1999, while the return since its inception in 1998 is 14.2 per cent.

The problem in buying funds like these is that they're not a pure play on China, says Prof. Kirzner, who teaches at the Rotman School of Management. Because of the difficulty in buying shares of Chinese companies, fund managers will often use companies listed in Hong Kong and Taiwan as proxies.

Check out Talvest China Plus -- 69 per cent of its assets were invested in Hong Kong as of June 30, with 27 per cent in Taiwan and the rest elsewhere. AGF China Focus was 95 per cent invested in Hong Kong as of Sept. 30. Some China funds go even further afield thanks to mandates that allow them to hold shares of global companies that do substantial business in China.

Fund analyst Dave Paterson of Paterson & Associates says most China funds are too new to properly assess. Of the two senior citizens, AGF and Talvest, he prefers the AGF fund. "This fund has produced better historical returns, with lower volatility," Mr. Paterson said.

Many China watchers in the investing world are excited about the new iShares FTSE/Xinhua China 25 Index Fund, which began trading this month on the New York Stock Exchange under the symbol FXI. This exchange-traded fund focuses directly on China by holding 25 of its largest, most liquid corporations.

Energy stocks account for almost 20 per cent of the Red Chips and H shares in the fund, followed by telecom, industrials and financials. For more information, visit the iShares website at http://www.ishares.com.

Like any other ETF, the China 25 fund is bought like a stock through a brokerage account of any sort. The dividend yield on the fund is a respectable 2.67 per cent and the management expense ratio is 0.74 per cent, a true bargain compared with the 3.5-per-cent MER of AGF China Focus and the 3.2 per cent of Talvest China Plus.

The China 25 fund is priced in U.S. dollars, which means Canadian investors would see their profits eroded if our currency continues to appreciate against the U.S. dollar. Still, experts like Mr. Hahn see it as a top choice right now for investing in China.

Another option for investing in China is a sort of mutual fund-ETF blend called a closed-end fund. Think of this as an actively managed mutual fund that you buy like a stock, rather than through a fund company.

There are several closed-end funds listed on the NYSE that focus to varying extents on China, all with the common trait of trading at either a discount or premium to their net asset value. These funds trade at a premium when they're in vogue and at a discount when they're not. Experienced investors only buy at a discount.

Some NYSE-listed closed-end funds that offer China exposure are the Templeton Dragon Fund (TDF), the China Fund (CHN), the Greater China Fund (GCH), the JF China Region Fund (JFC) and the Taiwan Great China Fund (TFC). For more information on these funds, visit the Closed-End Fund Center website at http://www.cefa.com.

It's possible to buy the shares of Chinese companies directly through the Hong Kong exchange or on the NYSE and other U.S. markets. Roughly 45 Chinese companies trade in the United States as American depositary receipts (ADRs), which are essentially versions of an underlying stock denominated in U.S. dollars. Among the Chinese ADRs available is PetroChina, which Warren Buffett has a stake in.

The experience of China mutual funds suggests that there will be huge years and terrible years. Last year's bonanza has been followed in 2004 by year-to-date losses in the range of 2 to 12 per cent. AGF China Focus, the oldest China fund, has posted five losing years in the past eight, including 2004.

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